The US Social Security Administration is set to dole out perhaps its biggest cost-of-living adjustment in four decades next year. That’s a welcome development for the 70 million beneficiaries of the Social Security and Supplemental Security Income programs, but it also adds another subtle element of support to inflation and underscores the problem with high and volatile prices: Even the remedies set up to protect the most vulnerable can prolong the problem.
Let’s start with the bad news, or perhaps the good news, depending on whether you’re a cash-strapped senior or an inflation-fighting central banker. The latest downswing in the highly capricious energy market is likely to prevent the adjustment from reaching double digits, which seemed possible before gasoline prices began to plummet a couple months ago.
Under Social Security amendments dating to 1972, the SSA bases the automatic cost-of-living adjustment, or COLA, on the average third-quarter level of the Consumer Price Index for Urban Wage Earners and Clerical Workers as compared with the period a year earlier. So far, energy prices have prevented the overall index from rising almost at all in July (and probably August). But the third-quarter comparison with 2021 means that Social Security and SSI recipients should still get around an 8.9% COLA for next year, even assuming optimistically that month-on-month inflation will remain near zero through September.
So what will that mean for seniors and the economy? First, seniors are clearly struggling from the rapid increase in prices. About half of older Americans said they had to spend emergency savings in the past 12 months, and an increasing number are turning to food pantries or the Supplemental Nutrition Assistance Program, according to a May survey of 3,056 people from the Senior Citizens League. Among other issues, seniors spend a larger portion of their incomes on medical care, as Mary Johnson, a Social Security and Medicare policy analyst with the Senior Citizens League, told me by phone on Wednesday.
Their premiums for Medicare Part B — the optional Medicare benefit that helps pay for doctors’ services and outpatient care not covered by the basic version — jumped 14.5% for the most recent year. They should recoup those costs next year when the new COLA kicks in and the Medicare premiums are expected to steady, but 2022 has been a slog for many. Bank of America Institute data published last month show baby boomers’ savings and checking account balances are starting to decline from their 2022 highs. The drop-off hasn’t been as drastic as it has been for younger cohorts, but boomers’ savings didn’t spike as much as theirs did in 2020 and 2021.
The latest developments also come after a long stretch of rising costs that may have been undercompensated by previous COLAs. There’s much unsettled debate about how best to measure the unique costs that seniors incur, but critics generally agree that the current way — treating older adults the same as every other consumer — is inadequate. There’s growing support for switching the COLA to an alternative index such as the Bureau of Labor Statistics’ experimental CPI, or CPI-E, for Americans who are 62 and older. For next year in particular, it’s not clear that the CPI-E would have helped seniors, but data from a longer period hint that Social Security’s purchasing power may not be what it was four decades ago.
Separately, there’s the macroeconomic impact to consider. Social Security and SSI benefits total about $106.3 billion a month, which annualizes to around $1.28 trillion, so the catch-up increase will conceivably add about $113 billion a year to household cash flows. In other words, the increase could amount to about a half a percentage point bump in overall personal income — small, but nevertheless relevant when the Federal Reserve is trying to douse the worst inflation since the early 1980s. Will it drastically alter the outlook for Fed Chair Jerome Powell? Absolutely not, but it’s another in a series of little factors that can eventually add up. Politicians must recognize that fact as they consider relief in the form of subsidies or, for instance, the student debt relief package unveiled recently by the Biden administration.
It’s noteworthy, of course, that the COLA mechanism itself is a creature of the 1970s, when high inflation last reared its ugly head. This kind of price volatility can be unbearable for seniors without significant other kinds of savings. All told, the COLA for next year — which will be officially announced in October — will be a welcome and critically important development for the beneficiaries. But it also offers important lessons about why sticky high inflation is a lose-lose for society. Even the protections put in place for the most vulnerable can help prolong the problem, which is yet another reason Powell is likely to bring the hammer down on inflation, which could push the economy into recession. Americans, and seniors especially, should brace for a difficult period ahead.
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